top of page
Writer's pictureKatharine Sciackitano

Abolish the Debt Ceiling

This dangerous and unnecessary law threatens to destroy our economy every few years and offers little benefit. As we stare down yet another crisis, the time has come to scrap the debt ceiling once and for all.

 

Almost out of nowhere, a recurring issue has reared its ugly head again: the possibility of total economic collapse. Yes, the federal government is yet again about to reach the debt ceiling.


The debt ceiling is simply a number set by Congress. The total federal debt cannot exceed that number, currently at $28.4 trillion. We actually already hit that ceiling back in July, but the Treasury Department has been using accounting gimmicks and other tricks to finance government payments without taking on new loans. Unfortunately, these “extraordinary measures” (as the Treasury Secretary Janet Yellen calls them) will not last forever. Yellen estimates that by October 18th, the federal government will need to take on new debt or default on its obligations. Such a default—the first in US history—would be absolutely catastrophic.


Firstly, the people who receive money from the government would suffer. It’s not exactly clear how the Treasury would attempt to ration its now very-limited cash, but a previous strategy developed during the 2011 debt ceiling crisis offers some insight. In that plan, the Treasury would attempt to meet all payments on Treasury bonds, bills, and other debts first. Every other recipient of federal cash (government contractors, federal employees, armed service members, Social Security beneficiaries, Medicare members, people in the social safety net, and more) would see their payments stop completely. This plan is not set in stone, and the Treasury could change it somewhat. No matter what happens, though, huge cuts are unavoidable. Seniors would be thrust into poverty by losing their Social Security benefits and Medicare coverage. Families and children would go hungry as food stamps stop coming. People would be cast out into the streets as rental assistance cuts off. Veterans and those in active duty would see their incomes disappear.


The drastic human cost of not raising the debt ceiling is almost incalculable. Millions of people would be left poor, hungry, or desperate. Even worse, this drastic despair is only the tip of the iceberg.


A severe recession is extremely likely if the debt ceiling isn’t raised. The federal government’s spending is a huge segment of our economy. Throughout the 2010s, the net outlays of the government accounted for around 20 percent of our entire GDP; since the pandemic, the number has gone up significantly. If we cut federal spending by huge margins, then we have an immediate downturn in economic activity. Additionally, all the aforementioned people who lose their benefits will cause a knock-on effect. If seniors or poor households lose their payments, they won’t be able to pay for things like rent or groceries. All the landlords and companies that rely on these people’s business will suffer; they will have to lay people off or reduce their purchases. These drops in spending will reverberate across the economy as more and more people stop spending money. The end result will be a compounded economic crisis. Even when the downturn ends, though, there will be long-term damage. Because federal debt is seen as risk-free, we can borrow at extremely low interest rates. If the government starts to default (or starts rationing to payoff debt), we will see a huge downgrade in our credit rating. There are already warnings that our rating could be downgraded to junk status. Even if we get out of this crisis, our creditworthiness will be doubted for decades. For that mistrust, we will have to pay higher interest rates on all our debt—drastically raising the costs of running the government. We would have to lower spending or raise taxes; none of which are ideal. On top of all these problems in the real economy, a financial crisis is also imminent.


Federal government debt is, to a large extent, the basis of financial markets. The markets for trading government bonds and bills are some of the biggest and most active in the entire industry. To a certain extent, all other instruments in finance are correlated with federal debt. A default on federal debt would make Treasury bonds and bills risky for the first time, and interest rates on government debt would spike. Because they are so interrelated, interest spikes would spillover into many other types of debt; even your mortgage or car loans could face hikes. With the bedrock ripped out, credit markets would contract and crash the economy more. Households and businesses would find it harder to afford loans because of higher rates, and this crunch would decrease consumer spending and business investment. The heightened insecurity would cause stocks and other securities to plunge, at least temporarily. Most ominous, the basic mechanics of finance could face turmoil. As the basis of the industry, government bonds and bills are involved in the deals that banks and firms use to do basic things like balance their books or get cash on hand. These mechanics are fundamental to the institutions operating at all. If treasury securities are no longer a no-risk asset, these transactions become a lot more complicated and risky for financial firms. Leading bank executives have warned that these effects would be catastrophic for the industry. Whatever you think of finance, the implosion of the financial system would be devastating to everyone around the world.


Looking at all the evidence, the debt ceiling crisis is a doomsday event for our economy. It might even be in the same league as the Great Recession. Despite all that, though, we are somehow in a debate where one side of the aisle refuses to raise it. Congressional Republicans, led by Mitch McConnell, are engaged in a game of chicken—with everyone’s livelihoods on the line. Without even a specific demand or negotiating position, the caucus has repeatedly refused to raise or suspend the debt ceiling. This situation harkens back to 2011 and 2013, where McConnell utilized the debt ceiling crisis to force Democrats to agree to huge spending cuts and conservative budget reform (these fights actually led to the downgrade of the federal government’s credit rating, which has still not recovered). This current fight is bringing us back to the precipice of financial ruin.


Despite all the brinkmanship and politicking the debt ceiling has caused in recent years, though, the debt ceiling always gets raised. For over a century, the ceiling has been completely useless. We all know that the federal debt has continued to grow tremendously. When politicians debate budgets and policy, they never care if the plans will go over some arbitrarily set line. The debt ceiling does nothing to enforce fiscal responsibility or anything else. If that is your goal, you need to go back to the drawing board. The debt ceiling only exists as a time bomb. We can reset the timer every few years, but as long as it’s around we risk it going off—and the going off, as previously discussed, means a huge recession and financial crisis. Any potential benefit of curtailing deficits simply does not exist. The downsides, however, are very real.


If we really want to be “financially responsible” and avoid this time bomb, we should just abolish the debt ceiling. Don’t just temporarily suspend it; don’t just raise it so we hit it after the next election. Get rid of it entirely. Effectively, the debt ceiling has always been abolished. By just raising it every few years, we have made it useless. If we just bite the bullet and scrap the law entirely, we can continue on as we always have but have the benefit of removing the threat of total economic ruin. The rest of the world has already caught on to this idea. Almost no other countries have anything like a debt ceiling.


The choice is simple: get rid of this ticking time bomb or live our entire lives with a perennial crisis of economic devastation. I, for one, know my choice. It’s time to abolish the debt ceiling.


Katharine Sciackitano is a third-year Economics major in the College of Arts and Sciences. She serves as a Managing Editor for the Agora.


Image courtesy Wally Gobetz, Creative Commons



Related Posts

See All

Comments


Welcome!

The American Agora is American University's home for opinion and commentary on politics, policy, foreign affairs, and campus issues.

 

Just as Agoras were the social and political centers of Ancient Greek life, the American Agora is a space for all manner of ideas to be aired and analyzed.

Our writers are students from a wide range of ideological backgrounds, covering a breadth of issues. On this website, you can find our editorials and our podcast.

All views expressed on this site are those of their authors. The American Agora takes no positions.

Follow Us
  • Instagram
  • Facebook Social Icon
  • Twitter Social Icon
Subscribe to our Newsletter
bottom of page